Finance tip – The Credit Score Secret

So the first finance piece on the blog for 2022 but the same disclaimer…. I am finance professional with 30 years of experience. That said the views expressed on this blog regarding personal finance are my opinion and any financial decisions you make you should do so after having done your own personal research.

If you live in the western world you have a credit score. Now our friends in the east (our Asian and Australian friends) might have something similar, if they do I am not familiar with what it is but its yet another “number” you are given to identify your financial prowess. Now that we are in the midst of the digital age it is very easy to accumulate data on consumers.

Bitcoin is a game changer

Be under no illusion, every financial transaction you make is being stored in some data base and scrubbed as part of meta data for analytics. How many people bought tooth brushes in Dec as opposed to Feb… That data is then resold to manufactures and other large corporations for great profit. Let’s follow the example a bit further… Let’s assume that in Dec tooth brush sales are 300% higher than Feb. That’s critical information for someone who makes toothbrushes, that could be the lynch pin info that creates high profits for their company. You get the idea.

So you as a consumer are given a credit score. It has been pumped up and built up to be a reflection on your overall prowess as an economic entity. Potential employers will do a “credit check” on you. Some dating sites as part of the vetting system perform these checks as a service for their clients. You even have social conversations (well pre covid anyway) where people would actively talk about their credit score as if it were some bench mark for success.

Here is “The Credit Score Secret”

The credit scores purpose is to grade you on your ability to finance material items you can’t afford

Simply put, your credit score is a benchmark on your ability to make payments on items you can’t otherwise pay for outright. Its far more lucrative for a company to sell you something and have you pay overtime with interest. First, they make more over time due to interest and Second, they can up sell you additional services that complement the original purchase.

The bottom line is, you only need a credit score if you are buying something you can’t afford. In my opinion, the only case you should ever need this is when purchasing a house. You should not be buying other items unless you can pay for them outright, and yes that means cars too. I can bend a little on cars but you don’t need a 50K car, a 10K car will suffice. It’s another illusion the finance industry has created for you.

“Give them a score so they can measure themselves against others”. Its clever, sinister marketing. That score is a curse because it really means you have a high probability of purchasing things you can’t afford and paying for them over time. It’s an indication of how poor at finance you really are, financing a TV, A vacation, a phone… It means you’re willing to pay MORE than the item would normally sell for.

Don’t be fooled by the finance industry. They want you to be good little consumers. “payments” means “interest” and interest is pure profit for them. The item is still worth 20k regardless, but you, because you want it now are willing to pay 30K for it over 10 years because you want it now. Companies love that mentality and that is the “credit score secret”

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Advanced Finance Tip: Annual Gift Tax Exclusion

DISCLAIMER: Any financial advice I give on this blog is my opinion based on 30 years of working as a finance professional. Before making any financial decision do as much research as you can to make an informed decision.

So in the U.S. we have an extremely complicated tax code, its frankly ridiculous but that’s another blog post entirely. One of the issues the more fortunate of us face is how do we leave our money to our offspring without getting killed on taxes. This doesn’t apply exclusively to the rich either. Middle class Americans who have any amount of money face taxation on their net assets. The older you get the less you actually need your assets to survive. Specifically, there comes a point in your life where you have enough money that generates income that you will not have to compromise your principal.

Again, this isn’t for everyone… Many people live paycheck to paycheck but there are some of us who have a paid for house, a good chunk of change in our 401K’s and are debt free. We aren’t multi-millionaires but we do have money in excess of necessities. You may ask yourself “well Karac, why can’t I just spend it on all those things I wanted to do in retirement?” I would say to you “what things?”

There is this myth that once you retire there is glut of items or travel that you are going to purchase. You likely aren’t going to buy a new car, a 2nd house, travel 1st class. I mean you may, but average middle class people don’t do this regularly in retirement. Once in a while? Yes. So we are sitting on cash, when we die you aren’t going to care what your 401K balance is, your heir’s or the government WILL care because they benefit from it.

Decades later, they will pay taxes on their inheritance.

This is when all sorts of tax issues can happen and depending on the family dynamic horrible drama. There is an option and that is gifting money to your heirs now prior to your death. In 2021 the U.S. allows for a Gift Tax Exclusion of 15K per recipient. So if you had 150K you could gift 15K to 10 people and not have any tax implications. There is a life time limit to how much you can gift, its 11.7 mil which most of us are never going to hit.

So the tip: When you are starting your retirement planning, it may be prudent to calculate annual gifts to your heirs. It’s likely that the money now will help them more than money later as they can then take the gift and use it to supplement their current income. 15K is a lot of money. If you retire at 62 and live the average age (in the U.S.) of 82-84 (let’s say 83) that’s 21 years. 15K a year for 21 years = $315,000.00 that your heirs are not going to inherit and pay associated taxes on.

Again this is an advanced finance/retirement tip. You should be doing a lot of research and planning when you approach retirement. For a good article on Gift’s and Gift Taxes check out the article here.

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Finance Tip: How to pick great company stocks

First and foremost, let me say that I am not a financial advisor, any finance posts you see on this blog are my own opinion based on decades of being in the finance industry and living my life. Now disclaimer out of the way, there is a method by which you can pick single company stocks that normally beat the indexes. It is another one of those dirty little secrets that a finance professional won’t tell you, but with a little common sense you could figure out on your own.

To be clear, I am talking about stock in one company like Apple, not mutual funds. These come with a much higher risk as your money is tied to the performance of one company exclusively. This method is one that I have employed in the past when helping to set up an investment portfolio for someone in my family circle. It is by no means full proof or for that matter scientific (from a math perspective) at all. It relies on a very subjective business measurement, done by multiple firms.

So what is this method? It is tracking annual lists of “the best places to work”

I know that sounds half assed, simplistic and an uncouth way to make a stock pick. Here’s the thing though, if companies are listed as “best places to work” isn’t the logical conclusion that they must have happy workers? Happy workers usually mean better services and products and that usually means higher sales which equals revenue.

How much is this going to cost me ?

Don’t dismiss this simplistic formula out of hand. Here is a few of the companies that made it on to multiple best places to work for 2021:

  1. Microsoft
  2. Nvidia
  3. In & out burger
  4. Google
  5. Delta Airlines

These aren’t small companies, as a matter of fact most of the are publically traded and provide great dividends. Now this method of stock picking isn’t absolute, companies can fall off the list at any time but the metrics used to evaluate “best places to work” are usually worker centric. That’s the secret sauce here because as I stated, happy workers = good products & services = profits = return on investment.

There is no one catch all best places to work list you should use, there are hundreds of them (if not thousands). What you want to do here is aggregate several (5-10) lists. So if Nvidia appears on 7 out of 10 chances are that’s a great place to work and this investment strat should be employed.

This ties in well to another piece I did about Aristocrat stocks here, combined if you employ both for a mid to long term investment cycle (5-25 years) you should do very well. Remember investments into the stock market are not guaranteed and should be done only after doing research and obtaining a good comfort level.

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Finance Tip: Commercial real estate vs residential real estate

Another financial tip post for the moderate to advanced investor. Normal disclaimer: This is my personal opinion based on decades of work in the finance industry. The intent of this post is to give you my opinions, observations and insights into my experiences to help you gather a more robust knowledge base to help you make good financial decisions.

We are in a hot real-estate market right now. Historically low interest rates that have been sustained for decades by the federal reserve have (IMHO) negatively impacted housing prices. That’s issue 1, issue 2 is Covid and the rental issues we saw over the last few years. Depending on where you lived there were eviction moratoriums, rent relief, on and on.

The long and short of it is, it’s a sellers’ market. Houses are going for premium prices and it’s likely that on the next down cycle those houses will decrease in value leaving many new home owners in an upside down equity position. We have seen this many times in the past, housing goes up and down but over a 30-year period you will likely make money on the investment. The other issue there is many people aren’t spending 30 years in a residence anymore.

As an investor real-estate is a great investment because the down turns normally don’t last too long and even when your equity position has down cycled the asset is still generating income via rent. Land is an entirely different discussion as the asset value is really predicated on the anticipation of are growth so I am not going into that here at all. Residential vs Commercial though is a very important discussion and when (and if) you are at the point in your investing life that you want to get into real-estate its crucial to decide which way you want to go.

In a market like the one we have now, if you had a portfolio of residential properties you could flip it and make a killing, again it’s a sellers’ market. The issue with residential properties is, and always will be the landlord tenant relationship. Flipping houses is one thing, that in my mind is a commercial endeavor you are never renting this space you are purchasing an asset and reselling the asset. Residential real estate is a headache because you have tenants.

The housing market is on fire, buy low, sell high….

Of course you have steady income via rent, assuming they pay of course. The downside is you are trusting your asset to people whom are using the space to live. Unlike a commercial property where your tenants are using the space to generate income.

I bolded the above because it is the lynch pin in the advice. How people live has so many variables we can’t discuss them all in one post. As a landlord you are beholden to their lifestyle, they could be wonderful and have the same moral compass you do, or they may not. The worst part of residential real estate is when you sell (if you do) the residential value isn’t simply the location of the asset but how the asset was maintained and other residential locations in that area.

Commercial property? Its highly likely that a commercial renter is going to do their best to maintain and in some cases upgrade the property to make sure they can generate income from their rental investment. The residential tenant has no income potential from your condo, sure their quality of home life is impacted but they go elsewhere to get money to live. The Commercial tenant relies on your property to generate income so they can live their life.

Its logical then to conclude your best possible income outcome is from commercial property. They are more expensive but you are renting (leasing) your asset to someone else who has in their best interest to maintain and maximize your property so they make money. The lease payments come in every month, the property is maintained, the tenant makes money. Everyone is happy and your asset is much more secure.

The residential property? Maybe you got lucky and got a renter who cares. Maybe you didn’t. Anytime something happens at the residential property you have to fix it. The commercial property? They will likely do it and ask for a credit. Residential, you have to take care of it and that time cost is immeasurable. At the end of the day, Commercial properties are less headache and higher income potential due to less time investment required by the landlord.

Today’s real-estate market is hot and residential properties are through the roof. That 3 store strip mall that services those residential properties? It’s always there, it’s always got traffic regardless of how much houses cost.

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Finance secret finance professionals won’t tell you (but I will)

It’s time for another finance piece on the blog. Before we get to far in remember that any advice you see here is my opinion based on 30 years of experience working in the finance industry. You should always obtain as much information as possible before making any financial decisions, and not take one bloggers advice as gospel.

The basis for wealth is income. Surviving in today’s world you need money and the more of it you have the more you can secure positive future outcomes. Simply put, income allows you to purchase things to make life better. TV’s, Food, Furniture, Housing on and on. The more income you have the more wealth you accumulate and that allows for the ability to make those purchases over longer periods of time.

“What’s the finance secret then Karac?”

It pertains to how you obtain income. Most of us exchange our time for money, you are getting an hourly wage. Even salaried people, you equate the hours worked to the money received. The problem with this method is there is a fixed number of hours you can potentially work. So your plateau for this income model can be reached quickly.

More governments will start regulating Bitcoin in the next 3 years.

Sure you can change jobs and get a raise or get a promotion but you pretty quickly cap at that level as well. A few years go by maybe you get raise but overall you are stagnant you are not growing your income profile and your wealth building slows. That isn’t to say you can’t have a great life and build wealth in this model, millions have. However, it always requires you to live with less now so you can have the same later on.

The secret is results based income. Essentially sales or production. Most people do not have an income based on results. Income based on results nullifies the weakness of time based income because results directly correlate to your skill. What may take me 3 hours may take you 1. Let’s say we are selling a graphic design for 5K. You worked 5 hours on it, I worked 10. Effectively you made double what I did, for the same result because it took you less time. Had we both been time for money based, I would have made more money for the same outcome.

Results based income is a fantastic way to maximize your earning potential and so little people do it. The finance industry wants you locked in to the time based job, making a fixed amount and saving a fixed amount. This enables them to project their earnings based on your investment strategy. A results based income earner is a finance professional’s nightmare. You could earn 50K in a week and then not have income for 2 months.

How can I forecast my fee’s off your investing with that kind of income model? This is why they don’t tell you about this income and wealth building model. Yes, it’s hard to pull off, but results based income is a great way to make a lot of money quickly. How do you do this? Look at all the people on EBay, they are essentially working on result based income models. They sell more they make more. So ya they have to hustle to get the product but that’s the return for them.

You? Go to work for 10 hours a day and make “X” every day, regardless of how hard you work. Even as a side hustle, selling the result = the greatest income potential for you. People will by anything, there is great demand. Teach someone a language, cut lawns, clean gutters, make walking sticks, resell used clothes on and on and on.

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Beyond the Trees

Thank you !

Hey folks, not a formal post today taking a day or two off from articles/formal posts. I do want to take a moment and say thank you. Thank you for taking your time to read my blog, like my posts, your subscriptions. All that really means a lot to me, I am a small blogger and it does go a long way to keeping me motivated.

Again, thank you so much for your continued support of me and the “A Gen X Point of View” blog.

Your Pagan Friend,

Karac

Some important facts to remember about our current inflation

So I have talked about it on my blog and it is the next boogie man to present itself which is great news for institutional media. They have to have something to scare you with, Trump is gone, Covid is clearing up (WATCH OUT FOR VAIRANTS!!!!!) and there are no wars so we get inflation. Should you be concerned about inflation? Yes, on a scale of 1-10? 3 -4. Inflation kills economies over the long term if (a big if) wages stagnate. If inflation is 3% annual and wages increase 2.5% annual your net to consumer is .5%. In one year that’s survivable. Over 10 years? That’s a problem.

Here are a couple of quick facts to remember about the current inflation situation in the U.S.

  1. The Economy was forced to slow down: We can argue why Walmart was open but local store X wasn’t, or why healthy people were precluded from doing what they want. We can’t argue that government closures and shutdowns due to covid had an adverse effect on production.
  2. Production decreased due to Item 1: Less cars were made, saw mills didn’t produce boards, ammunition production was decreased. And on and on…. The shutdown created a negative production situation as demand did not decrease concurrently due to government stimulus.
  3. Money still flowed: Yes, many people lost their jobs, but government printed money to subsidize those losses. So you had some money, or the same (maybe you worked from home) but you had less places to spend that money.
Maybe Bitcoin is the answer?

So what you have is companies forced to close and the economy slowed. This wasn’t part of the natural business cycle. As a result, less goods were produced, and people lost work, and government printed more money to get to those people. It’s the perfect scenario for short term inflation. Want another example? More people are on the roads now that things have opened up, gas prices go up. Why? Because refining gas was slowed during the pandemic because people weren’t traveling.

Again these are all short to mid-term issues which should begin to clear in the “new normal” my guess is by the start of the 4th qtr. (10.1.21) at the latest. Now anything can happen from now until then. A war, another pandemic, a massive oil spill, political upheaval so there are no guarantees. That said the underlying driver of capitalism is still very powerful, supply and demand. I want something, you have it we make a deal.

Inflation is the new boogey man, many of my younger readers have never experienced it or have read about it in the abstract in places like Venezuela or Liberia. It’s highly unlikely that, that kind of long term sustained inflation hits western economies because of supply and demand inherent in capitalism. Could it happen? Yes, if one of the 3 items on my list continues to happen, even in small doses. Don’t be pulled into the fear mongering, it is a click driver and most rational people can see that. Inflation is here yes, is the world ending because of it? No

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Couple of quick thoughts on “FIRE”

FIRE = Financial independence retire early. It is one of the newer concepts in the finance world and the practioner of it have some amazing stories, many are complete successes. Make no mistake about it, this is an extreme practice in the sense that your goal is to save as much as possible as fast as possible to achieve enough capital to generate income that enables you to retire early. Most of us have been trained by the media, government and financial professionals that you want to work until you’re in your 60’s then retire.

FIRE looks at those principals and proposes “Why not retire at 35 and take back 25 years of my time?” It’s a great concept and If done correctly is absolutely viable and something everyone should strive for. The issue is how do you come to a point where you are able to save 50-75% of your income? That’s essentially the range you’re going to have to hit to achieve this goal to retire in your 30’s, depending of course on your income year over year but that range is generally accepted in the FIRE movement.

What does that actually look like?

  1. No vacations
  2. Cheapest food possible
  3. Second hand clothes
  4. Used cars
  5. Cheapest rent possible
  6. Minimum utilities (no cable, no Wi-Fi)
I’m begging you, no more lists….

To list a few. See this is the hardest part and it’s something a lot of the FIRE sites don’t go into too much detail on. The fact is you have to have extreme discipline and sacrifice for a short to mid amount of time to achieve the long term goal. 10 years of living a minimalist life while accumulating as much income as possible while everyone else lives life? That takes a unique person to pull off but the payoff is what makes it all worth it. Imagine for a moment you have accumulated 400-800K thousand in savings via investments whatever by 35 and have no debt?

Could you live on that for 40 years? Yes, you probably could. You would not be leading an extravagant life style though. New Lexus? Nope. Vacation homes? Not likely. European trips once a year? Probably not. If you invested your money well and the markets return their historic averages which is between 8-10% on a 600K nest egg you would be generating between 45-60K a year (estimated).

That would all be passive income, you wouldn’t be working and you would have the benefit of being able to do whatever you want with your time. FIRE is a very unique nuanced movement it does work, you can do this, but it takes the right person to pull off. I admire the people that have done this, I didn’t I took a more traditional route and now in my 50’s I have a great financial situation but I’m 20 years removed from many of the FIRE practioner. I could probably retire now but that would mean my kids would have to pay their own educations which isn’t horrific, I mean I did it….

Maybe FIRE is right for you, I don’t know. If you really want to retire early you have to start working on it ASAP. Generally, the best way to accumulate wealth is to be debt free so all of your income you generate is not sent to someone else. Simply put, anything you can’t pay for outright you can’t afford and “payments” are giving someone else money so you can have something you can’t afford. You need to get out of that cycle ASAP and stop sending other people your income. Once that happens all your income can be used to generate more income and build your wealth profile. It piles up fast, but it remains stagnant if you do nothing.

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3 questions you have to answer before you invest in Crypto Currencies

Yes, today is another finance piece. As with all financial information given on this blog I want to stress that these are my opinions only. You should do as much research as you need to make sure you are educated and comfortable before making any financial decisions. I have been working in finance for nearly 30 years, I have a lot of experience and knowledge but I am one person, and I don’t know you.

Now disclaimer out of the way let’s talk a minute about crypto currencies. Unless you have been living under a rock you know generally what these are. Let’s get the formal definition out of the way first.

  What Is Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation. Source:

What does that mean in actual application? It means simply that groups of people agree that a virtual currency is worth “X” that group can be you and I, or you, me and your friend Rachel, or the 3 of us and 8 million other people. We can then exchange this currency for goods and services like you would any other currency (like dollars or pesos). It is virtual though, you don’t carry it in your wallet and it is not backed by a government.

Is this guy serious?

That’s how crypto is used, as an investible commodity though should we begin to entertain the notion of investing in crypto’s to diversify our portfolios? The answer is yes, with caveats, three questions need to be answered first.

  1. Are you risk averse? Simply put, does the risk of losing money scare you? Cryptos are a new asset class, unregulated and highly volatile. Yes, you can make a lot of money, you can also lose a lot.
  2. Do you already have a diverse portfolio? Are you just starting to invest, or have you been investing for years with a good spread of mutual funds, cash, other assets?
  3. Do you understand what Crypto is and how it works? Beyond my article have you used it yourself and understand its current application and can logically think about its future application?

These three questions are critical. If you answered yes to question 1, you should not invest in crypto. If you answered no to question 1 move on the question 2. If you answer no to question 2, you should not invest in crypto build up your other asset classes first. If you answer yes to question 2, go to question 3. If you answer no to question 3, do not invest in crypto. If you answer yes, green light go for it.

Summary:

Question 1: Yes Answer = Do not invest in Crypto. No Answer = Move to Question 2

Question 2: Yes Answer = Move to Question 3, No Answer = Do not invest in Crypto.

Question 3: Yes Answer = Go ahead and invest in Crypto. No Answer = Do not invest in crypto.

This is a very simple formula/questions that should provide you with very basic guidance to whether or not you are ready to invest in crypto. Like any financial advice, do as much research as you can and always trust your instincts.

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Finance Lesson: Many of you are going to see this for the first time

What is “this”? It’s called inflation. Many of you have never seen it and don’t really know what it is. You will begin to, if you haven’t already, hear more about inflation. As your Gen X friends will tell you, in the 70’s and early 80’s inflation was high. Mortgage interest rates at 15%+, yes that’s right you know those rates that are 3% or less now? Goods and services, in proportion to income was very expensive. Gallon of gas in 1980? $1.19 a gallon. I know doesn’t seem like much does it?

Not a lot of corollas back then, hybrids? Didn’t exist yet. You had gas guzzlers that were getting horrible gas mileage. Median income for a family in 1980? 21,000.00 Annual. However, the consumer price index from 1977-1980 increased 13.5%. That means, basically (not precisely) that the item you bought in 1977 was 13.5% more expensive just 3 years later. Now this wasn’t everything of course but it was inflation that was out of control.

Enter 2021. Notice the housing market is hot? Have you been to Home Depot to buy some plants or fencing for your yard? Prices are on average 6.5% higher than 2 years ago (for many goods and services not all). Now this is a result of covid, plus people going back to work plus government stimulus. So we have the trifecta of an inflationary period, increased government subsidy (more money in the market) more people working (more money in the market) and industries shut down for extended periods.

Am I contagious?
High amount of money and less goods and services = costs rise.

That in essence is inflation. Inflation is a good monetary solution to one or both problems. Meaning if prices are going up, demand is high (or goods are in shortage) that induces economic activity in those areas. A deep freeze in Florida kills the orange crop, oranges go up in price. Everyone gets 1000 in cash from the government, you are willing to spend more for the oranges now because someone gave you more money to spend. That gives the person producing the oranges more money to reinvest in orange production, increasing the supply and driving the cost down, overtime.

The issue here is time. The simple examples I have given are all in the abstract of time meaning the end game, increased production of oranges as I exampled, could take years. Now if the money supply decreases (the gov stops sending stimulus) you still have to pay the higher price for the oranges. This ushers in the inflationary period. The other lever that mitigates this scenario is increased wages, this is likely to happen as more and more of the world opens up.

In the short term you should expect to pay more for goods and services. It is a sellers’ market so to speak and if you have a skill or service that is in demand (construction, physical labor, lawn care etc.) this is an opportunity for you to make a lot of money. On the flip side, things you want are going to start costing more. That coffee you love every morning? The trucking company delivering to your shoppe is paying more in gas now, it’s likely that cost will transfer to how much your coffee costs.

Inflation is the reality of a good economy going through a natural ebb and flow. It’s not fun when things go up in price, unless you’re the one selling the item and making more money. I believe we are entering into an inflationary period, many of you have never seen it and will wonder what the hell is going on. $3.00 a gallon for gas? Very likely. Remember to keep an eye on your spending and keep an eye on wages for your chosen profession. It’s likely that as costs go up, so will wages but you must be willing to leverage your skill set (and possibly move jobs) to make more to mitigate the costs.

I think we are heading for a good period for workers, things are opening up and there will be good jobs to be had. The down side is inflation is starting to creep in and it’s been so low for so long I don’t think we can escape it this time.

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